Amending tax return

I Made a Mistake on My Tax Return - Should I Amend it?

By Tom Copeland. Posted with his permission.

Tax season is finally over. Yet, you now realize you made a mistake when filing your taxes. Should you amend your tax return?

As a family child care provider you shouldn't hesitate to amend your return. Your chances of being audited do not increase when you amend. Don't be shy about amending your tax return!

Use IRS Form 1040X Amended U.S. Individual Income Tax Return. You cannot e-file an amended return. I describe how to fill out this form, line-by-line in my 2012 Family Child Care Tax Workbook and Organizer.

You should amend your tax return if you forgot to report all of your income, you didn't claim all the hours you worked or all the meals you served, or didn't deduct all of your allowable expenses.

For every $100 of business expenses you claim on your amended tax return, you will probably get a refund of between $30 and $40.

Generally, you must amend your return within three years from the date you filed your original tax return or within two years of the date you paid the tax, whichever is later. If you filed your 2010 taxes on April 1, 2011, you have until April 1, 2014 to amend your tax return.

Additional Rules to Follow

1) Do not amend your return if you made a mathematical error. The IRS will catch this mistake and correct it for you.

2) When filing Form 1040X, attached copies of any schedules that have been affected by your change. In other words, if you are adding additional repair expenses on Schedule C, attach a revised copy of Schedule C Profit or Loss From Business, Form 1040-SE Self Employment Tax, and Form 1040 U.S. Individual Income Tax Return. If you are adding some additional hours, also include Form 8829 Expenses for Business Use of Your Home. Don't resend your original tax forms.

3) If you are amending for more than one tax year, file Form 1040X for each tax year and mail them to the IRS in separate envelopes.

4) If you owe additional taxes, file Form 1040X as soon as possible to minimize interest and penalties.

5) If you are claiming an additional refund, wait until you have received your original tax return before filing Form 1040X. You may cash your original refund check while waiting for the additional refund.

New IRS Tracking System

It normally takes the IRS 8-12 weeks to process an amended tax return. You can check the status of your return online three weeks after your file your amended return. Go to www.irs.gov and search for "Where's My Amended Return?". You can also call 866-464-2050 begin_of_the_skype_highlighting FREE 866-464-2050 end_of_the_skype_highlighting . This online and phone service is also available in Spanish.

State Tax Return

Amending your federal tax return may also require you to amend your state tax return.

Working with Your Tax Professional

If you are amending your tax return because of a mistake made by your tax preparer, you should ask your tax preparer to pay for the cost of amending the return. For example, you gave your tax preparer a list of the number of hours you worked in your home, but he/she did not report them all. If you didn't tell your tax preparer about a new couch you bought, you should expect to pay the cost of amending your return.

It may be that the cost to amend your tax return will be greater than any refund you will receive. If that's the case, don't amend.

If you forgot to include any of your business expenses, a new article that you should devalue, or any of your deductions, such as important medical expenses, YOU CAN NOT KEEP THEM TO INCLUDE IT IN THE NEXT YEAR INCOME TAX. You must include in the years that spending occurred, by changing the income tax, or forget it and lose the benefit.

See also my article "If I Amend My Tax Return Am I More Likely to Be Audited?"

Image credit: www.taxplannercpa.com

For additional information on how to amend your tax return, see my book 2012 Family Child Care Tax Workbook and Organizer.

www.tomcopelandblog.com

How to depreciate your house.

How to Depreciate Your Home

By Tom Copeland, posted with permission.

Every family child care provider who owns a home should depreciate it and claim a substantial tax deduction.

I've written a previous article about why you should never listen to anyone tell you not to depreciate your home.

Here's a summary of how to depreciate your home broken down into five steps.

First - Determine the portion of your home's value that you will use to depreciate. You need to use the lower of these two numbers: the purchase price of your home or the fair market value of your home at the time you first started using it in your business.

Let's say you bought your home in 2004 for $250,000 and you started your business in 2011. Look at your property tax assessment for 2011 to estimate the value of your home in 2011. If the value in 2011 was $260,000, we would use the lower $250,000 amount for depreciation.

$250,000

Note: Because of housing market decline in recent years it's possible your home was worth less when your business began than when you purchased it.

Second - Subtract the value of the land from your home value. If you are using the home value at the time you purchased your home, use the land value at that time. We will assume the land value in 2004 was $50,000.

$250,000 - $50,000 = $200,000

Three - Add to your home value any home improvements (remodeling, room additions, outdoor deck, etc.) and land improvements (fence, patio) that were done to your home before you went into business. Let's assume you added a deck in 2006 for $5,000 and remodeled your basement and bathroom for $20,000.

$200,000 + $5,000 + $20,000 = $225,000

Note: This amount will never change as long as you are depreciating your home.

Four - Multiply this adjusted value of your home by your Time-Space Percentage each year. The result is the business portion of your home that you can depreciate.

Let's say your Time-Space Percentage for 2012 was 35%:

$225,000 x 35% = $78,750

Note: If your Time-Space Percentage changes in future years this number will go up or down.

Five - Calculate the amount you can depreciate in the current year. Since 1994 you must depreciate your home over 39 years. In the first year of depreciation you will use a percentage based on the month your business began (see IRS Publication 587 Business Use of Your Home or my annual Family Child Care Tax Workbook for these percentages). After your first year in business, use 2.564%. Since you began your business in 2011, we will use this percentage for 2012.

$78,750 x 2.564% = $2,019

Claim $2,019 as your home depreciation deduction on Form 8829 Expenses for Business Use of Your Home.

As you can see, depreciating your home can represent a substantial tax deduction. If you haven't depreciated your home in past years you can either amend your tax return back three years and claim a refund, or file IRS Form 3115 to recapture unclaimed depreciation further back than three years.

Tom Copeland - www.tomcopelandblog.com

Image credit: freerealestateclipart.com

For more on how to depreciate your home, see my 2012 Family Child Care Tax Workbook and Organizer.

Getting a loan

I Can't Get a Loan Because My Profit is Too Small! Now What?

By Tom Copeland, posted with permission.

It's extremely difficult to get a bank loan in these tough financial times. It's even harder for family child care providers.

Why? Because when banks are determining if a child care provider can afford to pay back a loan, they will look at the child care provider's profit. This is shown on the bottom line of IRS Form Schedule C Profit or Loss From Business.

Since many child care providers do not make a large profit, they are often turned down for a loan.

Is their anything a child care provider can do to improve her chances of getting a loan to buy, improve, or refinance their home? Yes.

Your Schedule C profit is not an accurate depiction of your ability to pay back a loan. This is because there are a number of expenses on this form that do not represent payments you made that year.

 

The first type is depreciation. When you buy an item that you depreciate (furniture, appliances, computers, home improvements, etc.), you spread the cost as a business deduction each year over a number of years. The amount of depreciation expenses that are shown on your Schedule C do not represent any actual expense to you for that year.

Therefore, they should not be counted as an expense when applying for a loan. These depreciation expenses appear on Schedule C, line 13. When applying for a loan, the amount on this line should be subtracted from your expenses, which will then increase your profit.

The second type of expenses are your house expenses that appear on Form 8829 Expenses for Business Use of Your Home. Perhaps the biggest expense on Form 8829 is house depreciation (line 41). These expenses exist even when you are not in business. Therefore, they shouldn't be included on Schedule C when applying for a loan because they aren't paid out of your business income.

 

In addition to depreciation, you should remove the business portion of your house expenses from Schedule C, line 30.

After removing depreciation and house expenses from Schedule C, your profit will be larger and this may make a difference in qualifying for a loan.

Cash Flow Statement

If your bank officer won't consider your revised Schedule C, your next step is to prepare a monthly cash flow statement. This statement shows the sources of your monthly income and a listing of your monthly expenses. This statement would not include depreciation or non-business expenses (such as your house expenses).

You can download a free cash flow template taken from my book Family Child Care Business Planning Guide. Click on the tab "Web Components."

Bank officers are more likely to accept a cash flow statement, although you may still need to explain why this is a better reflection of your ability to pay back a loan than your Schedule C.

Don't give up if one bank turns you down. Go to the next one. A credit union or neighborhood bank may be more receptive to your loan application than a big bank.

What did you do that made a difference when you applied for a loan?

Image credit: loanpac.com

For more information, see my book Family Child Care Business Planning Guide.

Copyright 2011, Tom Copeland, www.tomcopelandblog.com

Posted by Tom Copeland at 01:30 PM in Money Management & Retirement, Record Keeping &